Friday, September 28, 2012

A recent survey of Americans by the Pew Research
Centre asked whether voters thought that the press had been fair to the
presidential candidates. With growing political polarization in the
United States, this is a rather interesting and timely topic.

As
background, the total sample included 1005 individuals, 249 who identified themselves as Republicans, 336 who identified themselves as Democrats and 355 who identified themselves as
Independents. A combination of landline and cell randomly dialled samples
were used and the total survey is considered accurate to within plus or minus
3.7 percentage points.

Nearly half
of those surveyed (46 percent) stated that they felt that the coverage of Mitt
Romney has been fair. As well, the same percentage stated that they felt
that the coverage of President Obama has been fair. The difference lies
among those who feel that the press is biased; 20 percent feel that the press
has been too easy on Romney and 21 percent feel that the press has been too
tough on him. In contrast, nearly 28 percent of those surveyed felt that
the press coverage of President Obama has been too easy compared to only 15
percent who felt that coverage had been too tough.

If we look
back at the 2008 election, 23 percent of all voters surveyed thought that the
press was too tough on John McCain compared to only 15 percent who thought that
the press was being too easy. In 2008, only 7 percent of all voters
surveyed thought that the press was too tough on candidate Obama and 31 percent
thought that the press was too easy.

Here is a
chart showing a summary of the data for both election cycles:

Those who
identified themselves as Republican tended to be more critical of press
coverage than their Democratic counterparts; 45 percent of Republicans think
that the press has been too tough on Mitt Romney (think about the recent video
release!). This is about the same level as during the 2008 election when
44 percent of Republicans thought that the press was biased against John
McCain. In sharp contrast, only 26 percent of Democrats think that the
press has been too hard on Obama; that said, this is up markedly from the 2008 election
when only 9 percent of Democrats thought that the press was biased against
candidate Obama.

Even more
interesting is the number of Republicans that feel that Obama is getting a
"pass" by the press. A hefty 60 percent of Republicans feel
that coverage of Obama is "too easy", again, sharply contrasting the
29 percent of Democrats that feel that the press has been biased in favour of
Mitt Romney.

The results
of this polling give us an intriguing look at how American voters view media
bias, particularly as it pertains to the candidate of their choosing. It
should not be terribly surprising that at least some of America's most
influential media outlets are up front about their political leanings, an issue
that is particularly noticeable now that "journalists" have 24 hour
news cycles to fill.

Tuesday, September 25, 2012

A recent
report entitled "Public Sector Pensions: a Runaway Train?"
by the Canadian Federation of Independent Business (CFIB) examines the looming
disaster facing Canada's severely underfunded pension plans. These plans
are backed by Canadian taxpayers and will ultimately result in higher taxes.
On top of that, Canada's defined benefit public sector pension plans are
far ahead of their private sector counterparts, an issue that will create
resentment as the two issues combine.

Canada's
public sector is a rapidly growing entity. At the beginning of 2011,
there were 3.14 million non-retired members of public sector pension plans, an
increase of 26.6 percent over the decade as shown on this graph:

By way of
comparison, the growth rate of private sector employment was less than half the
rate of the public sector, reaching 12.8 percent over the same decade.

The graph
shows us that membership in municipal government pension plans grew at 39.9
percent, followed by 23.1 percent for provincial government pension plans and
"only" 21.6 percent for those enrolled in federal government pension
plans. The overwhelming majority of these future pensioners are enrolled
in defined benefit plans, the Cadillac of pensions, where pension income is
guaranteed. In sharp contrast, private sector pension plan enrolment
remained flat at 2.9 million members over the decade and again, in sharp
contrast, only half of those future pensioners are beneficiaries of defined
benefit plans.

Public
sector employees do contribute a portion of their earnings to cover their
future pensions, however, those contributions are only 41 percent of the total
set aside. In 2011, of the $31.3 billion set aside for public sector
pensions, employees contributed $12.8 billion (highlighted in light blue) and the unfettered generosity of
Canadian taxpayers set aside the remaining $18.6 billion (highlighted in dark blue). On top of that,
taxpayers funded liabilities averaging $1.3 billion per year (highlighted in black) over the past
decade as shown in this graph:

Way back in
2001, an average of $5,754 (in 2011 dollars) was being set aside for the
pension of an average public servant; by 2011, this had risen to $9,976
annually, a 73 percent increase.

Despite the
setting aside of all of this money, the fact that most public sector pension
plans are defined benefit plans means two things; first, taxpayers' liability
for funding shortfalls is unlimited and second, the ultimate cost of the
pensions is a complete unknown since pension entitlements are tied to salary
levels. Estimates by the CFIB suggest that public sector pension plans
have a total liability of about $1 trillion against assets of $673 billion,
leaving taxpayers holding the bag for more than $300 billion. To put this
number into perspective, this is over half of the current federal net debt.

How bad
could this get keeping in mind that all levels of government are suffering from
the same problem? Right now, the City of Montreal Pension Plan costs
account for 13 percent of its entire operating budget. Tiny Prince Edward
Island with its 140,000 residents finds its public sector pension plan
underfunded by a whopping $436 million or $3,114 for every man, woman and child
on the Island. This is roughly 22 percent of the entire provincial debt.
To meet a portion of this underfunding, the Provincial Treasurer is
setting aside an annual payment of $23.1 million over the next ten years to
address only 50 percent of the current shortfall.

Canadian
governments at all levels may well find themselves in the extremely unpalatable
situation of having to explain to voters why taxes must rise to meet pension
shortfalls at the same time as private sector employees find that the value of
their defined contribution pension plans are not sufficient to retire on
comfortably. With a huge number of baby boomer public servants looking
their pensions in the face over the next decade, governments need to make
changes to their pension plans now, including changes to defined contribution
plans for new employees and the use of "career earnings" rather than
"best five year" earnings before the pension train runs over them. Unfortunately, the pension train and the debt train are likely to arrive at the station at the same time!

In the
second quarter of 2012, these federally insured institutions reported aggregate
net income of $34.5 billion, up $5.9 billion or 17 percent from the same period
a year earlier. The share of institutions reporting improved
year-over-year net income reached 62.7 percent with only 10.9 percent showing a
loss, down from 15.7 percent one year earlier. This is the twelfth
quarter in a row that the banking industry has registered a year-over-year
increase in net income. Here is a bar graph showing the quarterly net income for
the banking sector over the past four years:

Since the
first quarter of 2010, it's been good to be a banker! Aggregate profits
are just off their peak of $35.2 billion in the third quarter of 2011 but well
up from their losses of nearly $37.8 billion in the fourth quarter of 2008 alone, the
year that American taxpayers stepped up to the plate to bailout the banking
system.

Of the 7246
banks and savings institutions currently covered by the FDIC, only 732 are
considered to be "problematic", down from 772 in the previous quarter
and down from the eight year peak of 884 at the end of 2010. This is the
lowest number of problem banks since the end of 2009. Here is a bar graph showing the dropping number of
"problem" institutions:

While the
number of "problem" institutions is dropping, albeit slowly, you will note that even
at current levels, the number of "problem" banks is up over 1100
percent from its average annual level of 65 between 2004 and 2007 and has only
dropped 17 percent from its peak value. This suggests that if part 2 of
the Great Recession becomes entrenched in the economy, the banking sector could
see new record levels of failure.

Fifteen
insured institutions failed during the second quarter with another nine failing
thus far in the third quarter, bringing the annual total for 2012 to forty thus
far. This is the lowest number of problem banks since the end of 2009.
At this point last year, there had been 68 failures. Here is a
graph showing the number of failures since 2009 in red:

Here is a
bar graph showing the rapid growth in the size of the assets of
"problem" institutions since the beginning of the Great Recession:

Again, while
the assets of "problem" institutions have dropped by 30 percent from the peak of $402.8 billion at the end of 2009, the number is still up 1700 percent from
its 2004 to 2007 average level of $16.4 billion.

There is no
doubt that, when measured in terms of net income, the banking sector as a whole
looks very healthy. What is of some concern is the dramatically elevated
levels of both "problem" institutions and the assets of these
institutions. We are now three full years into the post-Great Recession recovery
and yet significant parts of the banking sector are still under stress.
This could prove to be a big problem for American taxpayers when the
banking sector comes hat-in-hand looking for another bailout if the Eurozone
influenza crosses the Atlantic.

Friday, September 21, 2012

While anyone
who has read this blog before will quickly realize, I'm no fan of the Federal
Reserve. More specifically, I'm no fan of the unfettered powers granted
to the world's central bankers, a group of men who, not unlike most of us, put
their pants on one leg at a time but you'd never know it from the way that they
have been granted powers that control the world's economy.

That said,
I'm also no fan of falsely based criticism of said organizations. A
little-covered aspect of Mitt Romney's recent commentary to his $50,000 a plate
comrades went like this:

“Yeah, it's interesting... the former head of
Goldman Sachs, John Whitehead, was also the former head of the New York Federal
Reserve. And I met with him, and he said as soon as the Fed stops buying all
the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the
debt that America issues. He said, once that's over, he said we're
going to have a failed Treasury auction, interest rates are going to have to go
up. We're living in this borrowed fantasy world, where the government keeps on
borrowing money. You know, we borrow this extra trillion a year, we wonder
who's loaning us the trillion? The Chinese aren't loaning us anymore. The
Russians aren't loaning it to us anymore. So who's giving us the trillion? And
the answer is we're just making it up. The Federal Reserve is just taking
it and saying, "Here, we're giving it." It's just made up money,
and this does not augur well for our economic future.” (my bold)

This caught
my attention largely because I had just posted on this very issue a few short
days ago and largely, because the part about the Fed buying three-quarters of
the debt that America issues is dead wrong.
I must say, however, that I do agree with his “made up money” comment as
well as his suggestion that eventually the world will stop buying Treasuries.

Here is a graph from FRED showing the Federal
Reserve's holdings of all U.S. Treasury securities:

First,
notice that the Fed has owned Treasuries for many years, it is not a new thing. Just prior to
the Great Recession, the Fed's holdings of Treasuries actually peaked at $790.8
billion in August 2007 when it began to liquidate its holdings as the economy
looked increasingly shaky. The Fed's first foray into QE really began at
the beginning of April 2009. The Fed's holdings of Treasuries had been
steady in the months before that, dropping to a range of $475 to $480 billion
once the Great Recession took hold. By the end of their first round of
purchases in November 2009, the Fed held $776 billion worth of Treasuries.
Their holdings remained at this level until August 2010 when their second
round of Treasury purchases (QE2) kicked in. Their holdings reached $1.65
trillion by the end of August 2011 and have remained in a range of $1.63 to
$1.68 trillion for the past 12 months. Looking back to the previous peak
in 2007, you'll see that the Fed's holdings of Treasury securities has really
only increased by $859 billion in the five year period. As well, since
Treasury purchases began in April 2009, the Fed has added roughly $1.173
trillion worth of Treasuries to its balance sheet.

Here is a
chart by SIFMA
showing the outstanding Treasury debt by type:

In total,
there are $10,749.9 trillion worth of Treasury securities outstanding.

We can also
use this data from the Treasury which shows very
nearly the same number under Marketable Debt:

Let's now go
back to the Treasury data from April 2009 when the Fed implemented QE1 and
see what the outstanding balance of Marketable Debt:

At that
time, there was $6.363 trillion in marketable Treasury securities outstanding.

Taking the
current level of $10,749.9 trillion and subtracting the level of $6.363
trillion in April 2009 when QE first began, we come up with $4.387 trillion in
new debt. Please note that these figures do not including the re-issuing
of older, maturing debt. As I noted above, since QE began, the Fed has
purchased $1.173 trillion worth of Treasuries or 26.7 percent of the total new
debt. That's not even close to Mr. Romney's "...three-quarters
of the debt that America issues...". It's even worse if you look at
the Fed's holdings from the perspective prior to the Great Recession when the
Fed held $790.8 billion worth of Treasuries, his logic is even more off kilter;
from that data point, the Fed has purchased only $859 billion of the total
$4.387 trillion of new debt or 19.6 percent of the total. If you look even further along in time, the
Fed has not purchased a significant volume of Treasuries over the past 12
months so there is absolutely no way that they are currently buying 75 percent
of new debt.

Yes, it is
quite likely that during certain short periods of time within each easing
period, we would find that the Fed was purchasing the majority of new debt
issued but that most certainly is not the case over the entire period and it is
not the case now.

What's more
than a bit scary is when an avowed capitalist and wannabe President uses faulty
"facts" to badmouth the already unloved Federal Reserve, we should
all be concerned about his ability to do the right thing for the right reasons
when he gains political control.

The moral of
the story? Never let facts get in the way of a good, political campaign.
While I'm first in line (or nearly first) when it comes to criticizing
the Fed, at least I try to be factual about it.

Subscribe To

About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.